AUD/JPY struggles to extend recovery above 98.00 ahead of Aussie Employment
|- AUD/JPY’s upside appears to have stalled near 98.00 ahead of the Australian labor market data for July.
- Fading global risk-aversion has weighed on the Japanese Yen.
- The BoJ is expected to raise its interest rates to 1% by the year-end.
The AUD/JPY pair rises to near 97.87 in Wednesday’s European session. The cross struggles to extend its upside above the immediate resistance of 98.00 as investors have sidelined ahead of the Australian Employment data for July, which will be published on Thursday.
The Aussie Employment report is expected to show that the labor market was added with fresh 26.5K payrolls, lower than June’s reading of 50.2K. The Unemployment Rate is seen steady at 4.1%. Easing labor market conditions would prompt expectations of interest-rate cuts by the Reserve Bank of Australia (RBA) sooner rather than later.
Currently, financial markets expect that the RBA will not reduce its key Official Cash Rate (OCR) this year. Market speculation for the RBA pivoting to interest-rate cuts next year were prompted by RBA Governor Michelle Bullock’s hawkish guidance. Bullock said last week that the central bank is vigilant to inflation risks and interest rates would be hiked further if needed.
Meanwhile, improved market sentiment continues to provide support to the Australian Dollar (AUD). Global risk-appetite improves as fears of a potential United States (US) recession have waned.
On the Japanese Yen (JPY) front, easing widespread risk-aversion has weighed on safe-haven flows to the Yen. The next trigger for the Yen will be the preliminary Q2 Gross Domestic Product (GDP) data, which will be published on Thursday. The Japanese economy is estimated to have grown by 0.5% after contracting at a similar pace in the previous quarter. Upbeat GDP growth would boost speculation for further policy-tightening by the Bank of Japan (BoJ).
In the last monetary policy meeting, the BoJ hiked its interest rates unexpectedly by 25 basis points (bps) and announced plans to taper bond-buying operations. A research note from Danske Bank showed that the BoJ could raise its interest rates to 1% within the coming 12 months.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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